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Does Government Expenditure Matter for Economic Growth?

Author

Marion Laboure and Emmanuelle Taugourdeau

This paper aims to determine how the composition of public expenditure affects countries’ economic growth depending on their level of development. We show that there is a strong association between a country's level of development and the amount of public spending. Productive spending dominates in poorer countries while richer countries have a higher proportion of unproductive spending. Furthermore, productive spending has a greater effect on growth in poorer countries. We illustrate our findings using dynamic panel GMM estimators with data from 147 countries (31 low, 69 medium and 47 high-income countries) covering the period 1970–2008. We also find that education expenditures are the more productive public spending.

Policy implications

High-income countries should decrease their overall expenditure and reconsider their education and health expenditures in a more productive way.

High-income countries should reduce their public spending until reaching the productive level threshold.

Low-income countries have some leverage to increase further their public spending (and especially on education and health).

Education expenditure should be favored by all income level countries (low-, middle- and high-income countries).